Banks issuing more margin calls as market undergoes a correction
Banks say they are issuing more margin calls to investors after recent falls in the sharemarket wiped most of the bourse's gains for the year.
The S&P/ASX200 Index is down more than 10 per cent since its peak in May, as investors sold off shares in the wake of the US Federal Reserve flagging it will wind back its stimulus program. Fears over the prospect of a credit bubble in China have also weighed on sentiment.
Margin lending occurs when investors borrow money to invest in the sharemarket. Banks are required to make a call to investors when the securities they hold decrease in value beyond a certain level.
Bendigo and Adelaide Bank, the country's fourth-largest margin lender, said the recent market falls had triggered a rise in the number of margin calls, but the number was still low given "market volatility and when compared to historic levels".
"Of course, in a falling market, people are required to cover their security," a spokeswoman said.
The sharemarket fall has coincided with an extraordinary sell-off in Australian government bonds, with 10-year yields hitting a 15-month high on Monday. Chinese equity markets also witnessed their biggest daily loss in four years this week after diving 5.3 per cent in Shanghai and 6.7 per cent in Shenzhen on Monday.
National Australia Bank's head of equity lending, Adrian Hanley, said the number of marginal calls made by the bank had lifted to an average of 30 calls a day per 10-12,000 clients in recent weeks, up from 10-20 calls a day before the market dropped off.
This was significantly lower than during the global financial crisis, when an average of 700 calls were being made. However, he said clients now received an SMS or email when they were about to reach their buffer, reducing the need for as many calls.
"We have seen a marginal lift in margin call activity because of the recent wave of volatility," he said. "But clients are still entering the market at more conservative levels, maybe as a result of the GFC experience where they sailed a bit too close to the wind."
Mr Hanley said gearing levels currently averaged 30 per cent, compared to pre-GFC levels of 45-50 per cent.
"They are leaving themselves an additional buffer to manage these occasional bouts of volatility."
BT Financial Group's head of equities, Cathy Kovacs, said the market fall had meant the bank was putting in more calls to borrowers, but that loan-to-value ratio was still low, meaning it was low risk to the bank.
"People are not excessively geared in this market," she said. "There has been an increase [in margin calls] but levels remain very low."
Investors who receive a margin call are required to either deposit more money into their trading account or sell some assets.
Reserve Bank figures from March show about $12.5 billion is tied up in margin loans across Australia, down from a peak of $41.5 billion in the December quarter of 2007, but higher than the previous quarter at $12.2 billion.
The country's biggest lender in the sector, CommSec, would not comment on the state of its margin lending book.
The sell-off in equities in recent days has seen billions stripped from the Australian sharemarket, after the US Federal Reserve flagged last week that it might end its multimillion-dollar bond-buying program.
This caused 10-year US government bonds to spike, rising 14 per cent last week.